Introduction
On 29 July 2024, the European Court of Justice (“CJEU”) issued a new judgement (“KEVA”, C-39/23) that concerns public pension funds, WHT and the EU fundamental freedom of capital movement.
The case was brought by the three Finnish public pension funds (Keva, the Landskapet Ålands pensionsfond and the Kyrkans Centralfond). The Finnish pension funds received dividends from Swedish companies in the period from 2003 - 2016. These dividends were subject to Swedish WHT. However, Swedish public pension funds are exempt from such WHT.
According to the CJEU judgement, the Swedish regulation under which dividend payments by resident companies to foreign public law pension funds are taxed at source, while dividend payments to domestic public law pension funds are exempt from WHT, constitutes a discrimination via tax law and an unjustified infringement of Art. 63 TFEU.[1]
Importance of the judgment of the CJEU
The recent decision of the European Court of Justice is good news for the EU capital market, in line with its prior case law in comparable cases.
The judgement is important not only for EU pension fund entities, especially those regulated by the IORP Directive (2003/41/EC) as transformed into national regulatory law, but also for pension funds from third countries. Further, its importance is by no means limited to WHT suffered in Sweden, but covers many additional EU jurisdictions.
This is because, in a nutshell, the CJEU does not give credit to comparability arguments referring to formal differences between the pension funds, like different contribution collection and pension payout methods or the legal form of the public pension funds. Instead, the Court focuses on the substance of the pension funds, their (social) objective and function. Thus, national court decisions applying a mainly formal approach to the comparability analysis seem questionable.
For example, in the case of the CJEU judgement dated 13 November 2019, C-641/17 (College Pension Plan of British Columbia), German national tax courts denied the right of the (tax-exempt) Canadian pension fund for a refund of German WHT with the - very formal - argument that the applicant did not set-up (tax-deductible) reserves in the same way as a German comparable entity. The German courts did not consider sufficiently the identical purposes of both entities and the fact that, in the end, all (or almost all) of the income generated by the two pension funds is attributable to the pensioners (however, under differing formal mechanisms).
Based on the recent CJEU judgement, it ought to be expected that the WHT situation of foreign pension funds in Germany (and in further EU jurisdictions) is not yet settled and will be tested before the courts. Public law pension funds should therefore review their WHT positions.
For the national analyses of the KEVA judgement, please refer to this Infoletter’s below sections on Finland and Sweden.
[1] The CJEU judgement follows the opinion of Attorney General Collins issued on 21 March 2024, also see Infoletter # 32, dated April 2024
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